The House That Private Insurance Built

Following the old adage to never stop digging when you've created such a nice hole for yourself, AHIP is now touting a report (pdf) released by one of its member insurers: the Blue Cross Blue Shield Association. Like AHIP's report, Blue Cross Blue Shield finds that premiums will shoot into the sky with health-care reform. Like AHIP's report, Blue Cross Blue Shield leaves out little things like the insurance exchanges, the excise tax, the delivery system reforms and pretty much everything else in the bill. Like AHIP's report, Blue Cross Blue Shield argues for a stronger individual mandate, which makes policy sense, even if the conclusion is presented dishonestly. Like AHIP's report, Blue Cross Blue Shield does not present any options for funding a stronger mandate.

But what's interesting about the BCBS report is how clearly it shows that insurers have gotten themselves into this mess. Essentially, they've spent so long pricing the sick and the old out of the individual market that they don't really know what to do when they're allowed back in. Consider this paragraph from the analysis:

Insurance reforms alone will substantially increase claims costs in the individual market. The individual market “risk pool” will be less healthy than today and will drive higher insurance premiums. We estimate the average medical claims for the uninsured are 20 percent higher than claims in the current individual market. In addition, certain segments with high medical utilization who are now insured through other arrangements will enter the individual market as a result of guaranteed issue and modified community rating requirements. This includes people enrolled in state high-risk pools, people on COBRA through their former employers’ coverage, and other group conversion policies.

Or this one:

In most parts of the country today, insurers in the individual market are permitted to underwrite and design benefit plans with a variety of price points. This flexibility enables a stable, competitive insurance market. Perhaps most importantly, it offers the greatest affordability to attract younger and healthier members and helps encourage wider enrollment in health insurance.

This is the house they've built: an insurance market where plans are written for the healthy and all legal efforts are made to exclude the sick. That's meant premiums are somewhat lower than they'd otherwise be, but only because the people who most need health-care insurance aren't able to afford it, or in some cases, aren't able to convince anyone to sell it to them. Now that arrangement is ending and they're scared that they can't provide an affordable product to the people who need it. They may be right, but it's evidence of how deeply perverse their business has become, not of what's wrong with health-care reform. When they say that the individual market would be cheaper in the absence of health-care reform, they're saying the individual market would be cheaper if they could continue refusing to sell affordable insurance to people who need health-care coverage.

This isn't an argument against health-care reform. This is proof of its necessity.

It also proves that for-profit insurance is fundamentally a flawed model as is, for that matter, for-profit health care. Insurance is for risk-pooling and cost-spreading, and there is no way to accomplish those two goals better than having single-payer or Medicare for All. Private for-profit insurance just adds nothing of value to what can be accomplished by single payer.

Btw, a friend was recently in a terrible bicycle accident in Spain and fractured her back. All treatment was free--they didn't pay for anything but a brace for her to travel home in. Now she's finally home and in addition to recovering will have to worry about becoming uninsurable (and she has kids) until we finally get something equivalent to what Spain has.

Ezra - Guaranteed issue and community rating without an individual mandate will mean that instead of the sick being priced out of the market as happens now, the healthy will be priced out. This is a legitimate concern. You can criticize insurers all you want, but that doesn't create a solution.

But the number of people uninsured who can take advantage of the moral hazard presented is so tiny it's hard to see these doomsday predictions coming true. In Massachusetts, about 2% of the population is uninsured. How much damage can 2% really do, especially since at most only 20% of them will incur big costs anyway. Not only that, there's no guarantee those big costs will be covered. Not every major medical expense is completely foreseeable.

I think all of these claims that the weak mandate is going to blow up the system are so completely overblown it's ridiculous.

i don't understand something, Ezra, and would really appreciate an explanation. Don't the provisions that apply to the insurance exchanges, the delivery system reforms, etc., NOT affect employer-based insurance plans? Don't people keep telling us nothing will change with those plans? But, if the insurance industry all of a sudden has to cover more people who will cost more (because they are sick etc.), won't that impose costs on them that they will then pass on in the form of higher costs to employers for plans for healthy employees? Which then either get passed on as either higher premiums or reduced wages for said healthy employees? Employees who don't qualify for the subsidies? Whether or not it's a problem of their own making, and I don't disagree that it is, the point remains that insurance companies aren't just going to eat the costs of insuring people whose care is expensive. They are going to pass those costs on in the form of higher premiums. Premiums paid by the healthy and the employed. Right?

The government has been meddling with the insurance companies for so long (see the HMO act of '73 for a for-instance) that it ought to be difficult these days to call it a "market" with a straight face.

It's more like, "This is the prison that the government has built for the insurance industry."

And nothing the government has up its sleeve will do anything to unlock that prison, or to bring any true market forces to bear on the problem that government has created.

This completely ignores the reason the insurance is so expensive: utilization and cost increases. We price based on the underlying cost of providing care. Those costs go up, our premiums go up. It's not that difficult to understand. We didn't "build this house" as Ezra claims. We're operating within the system that exists. As long as people can choose when they want to buy insurance, we have to have the ability to underwrite the risk and deny coverage.

Rather than continually focusing on the insurers and trying to demonize them maybe the Democrats ought to be attacking the true source of all this: rapidly rising medical costs. "Waste, fraud, and abuse" are not enough. We do not control the costs of providing care, and when we tried to in the 1990's the public revolted. Everyone is taking more trips to the buffet and choosing the more expensive meals when they get there, and then railing against the restaurant for raising the price. We could stop making a single dollar of profits and make every single one of our executives work for free, and that would be a drop in the bucket compared to increase in medical costs. The insurers are not to blame.

According to mbp3, "Guaranteed issue and community rating without an individual mandate will mean that instead of the sick being priced out of the market as happens now, the healthy will be priced out."

Does anyone see how we are sticking to a system where people still need to purchase their coverage? If we did it the Scandinavian way as Matthew Yglesias has stated we would all have guaranteed health care based on need, controlled democratically, and financed through solidarity.

ab13: If what you say is true and insurance premiums have only gone up because of more use, why have insurance company profits gone up even through the market turndown, running well above inflation and outpacing other industries?

"As long as people can choose when they want to buy insurance, we have to have the ability to underwrite the risk and deny coverage." so when there is a mandate to buy insurance, no one will be denied coverage, right? That means that costs for determining who gets insurance should go way down, since everybody will be covered, right? Somehow it doesn't seem like these cost savings have made it into the insurance companies analyses of what healthcare reform will cost.

msoja, if you want market forces to work, then it is inevitable that many poor people will be priced out of the insurance "market". If healthcare is a scarce commodity, then only those with the ability to pay will get it. If we consider basic health care a human right, using a market to distribute it would be a crime.

@srw3: "why have insurance company profits gone up even through the market turndown"

They haven't. Insurers are making the same slim margins now that they were before the recession. In some cases even lower, because people afraid of losing their job and hence health coverage are driving up utilization. Maybe you are mistaking absolute dollars for profit margins.

"so when there is a mandate to buy insurance, no one will be denied coverage, right? That means that costs for determining who gets insurance should go way down, since everybody will be covered, right?"

No, it doesn't mean that. Some of the uninsured are healthy, others are uninsured solely because they are unhealthy. And getting everyone covered does not solve the problem of utilization growth, in fact it only makes it worse.

"Somehow it doesn't seem like these cost savings have made it into the insurance companies analyses of what healthcare reform will cost."

Because there aren't any significant savings in the proposed reform. There is just coverage expansion and empty promises on future cost control. There is no "curve-bending" other than upward curve-bending from covering more people.

You can consider it all you like, but it's no such thing. You do not have the right to something out of someone else's pocket.

The right to one's own life, the right to liberty, are human rights. They cost no one anything. They place no burden on anyone.

Health care is a thing. Insurance is a thing. You do not have a right to things. You have a right to seek to provide things for yourself within your own capabilities, but you have no right to take things from others, for the moment you do so, you disrespect those others' rights to their own lives and their own freedom.

Think about this: The only way to "insure" everyone is to FORCE, by dint of law (with all the implications for very real threats of impoverishment and/or incarceration, or worse, should anyone be foolish enough to resist the government agents who will be sent around to enforce the edict), certain citizens to provide insurance and health care for certain other citizens. It is nothing less than enslavement, and it's a disgrace.

i know this is going to sound obnoxious but couldn't Ezra have found two people that WEREN'T OBESE to put in the picture with those lovely "victim of private health insurance" shirts?

Isn't there a physically fit victim of private health insurance???

and pseudo MY FRIEND, go ahead and end the anti trust exemption, I DARE YOU. let them sell across state lines. Just make sure you blame the right people when mandates that are important to one state like mine (Autism coverage, infertility) and too costly for a state like Mississippi/Alabama/Louisiana don't get in the way. That's the problem with Democrats in congress. They don't think more than one step ahead of themselves.

I'm not really an expert, but it was my understanding that using profit margins for cross-industry comparisons is not a terribly accurate way to assess how lucrative your business model is. Walmart has pretty low margins, but I don't think anyone would say Walmart isn't profitable. A somewhat better way of measuring profitability would be to consider various risk-adjusted return metrics. Looking at Return on Equity (ROE) or Return on Invested Capital (ROIC) for example, will reveal that the insurance companies do quite well for themselves (for starters, Aetna has 13.52% ROE. As a comparison, Pfizer, which is insanely profitable by just about any measure, has an 11.02% ROE). Not that looking at ROIC and ROE don't have their disadvantages too--higher levels of of debt financing have a tendency to inflate ROE, for example. I'm not trying to attack ab13 here, but insurance companies crying poverty while still making rather large gross profits (gross in the technical sense of revenue - cost) is a bit disingenuous. The real story is slightly more nuanced.

Btw, a friend was recently in a terrible bicycle accident in Spain and fractured her back. All treatment was free--they didn't pay for anything but a brace for her to travel home in. Now she's finally home and in addition to recovering will have to worry about becoming uninsurable (and she has kids) until we finally get something equivalent to what Spain has.

Posted by: Mimikatz | October 14, 2009 5:36 PM | Report abuse

I love how some idiots send the world into hysterics and assume that anyone that has ever submitted a claim is forever denied coverage in the US. You do realize this statement is as dumb as the "death panel" talk of the right don't you?

But the number of people uninsured who can take advantage of the moral hazard presented is so tiny it's hard to see these doomsday predictions coming true. In Massachusetts, about 2% of the population is uninsured. How much damage can 2% really do, especially since at most only 20% of them will incur big costs anyway. Not only that, there's no guarantee those big costs will be covered. Not every major medical expense is completely foreseeable.

I think all of these claims that the weak mandate is going to blow up the system are so completely overblown it's ridiculous.

Posted by: consid24 | October 14, 2009 5:59 PM | Report abuse

this is nice. except MA is not at 2% they're at 3-4%. And we're not talking MA we're talking the entire country. The bills range from leaving 18-25 million still uninsured. Your figure of 2% represents about 6 million. So we're talking not 2% we're talking between 6 and 9% when the total uninsured population is 15%. If those 6-9% are the healthy staying out of coverage and paying a small tax then absolutely they'll damage the system and raise cost. Look at NJ in comparison to MA. NJ has basically the same structures of MA (except NJ does have a small window of people subject to pre-ex while MA has no pre-ex). NJ has no individual mandate. NJ's costs are skyrocketing and MA is going up but not nearly as much. That's what a lack of a strong individual mandate will do. And as long as NJ doesn't have the mandate we'll keep losing the healthy and keep the sick.

"I love how some idiots send the world into hysterics and assume that anyone that has ever submitted a claim is forever denied coverage in the US."

I love how somebody who *earns a living* out of the uncertainty of people in the current non-system -- see visionbreaker's Handy Hints And Trade Secrets in threads past -- laughs at people who have genuine fears that the pre-existing condition rug might be pulled from under them.

I bet you don't call people "hysterical idiots" when they call you up with their wallets open to ask about such things.

AHIP submitted testimony to the record as well, noting that the organization had completed an internal investigation of 700 million claims voluntarily submitted by 19 unnamed insurance companies in 2006 and found the denial rate to be only about 2.36 percent.

2.36%. Sounds like our friend MimiKatz may be worrying her friend for nothing. And i love the "AND SHE HAS KIDS" comments. Is that supposed to elicit additional sympathy as if the big bad insurer denying her claim isn't evil enough? Doesn't she have puppies too? Wouldn't the insurer kick them too?

Oh and BTW, stats show (i'm looking them up now) that Medicare denies more claims than private insurance. I saw it in congressional testimony before Rep. Kucinich's hearing with health insurers.

And if they lied under oath (which I'm assuming you'd think) why aren't they in jail???

i know you don't trust the healthcare economist. Honestly I don't know them. Just googled them. But i DO KNOW the "AMA". you know them right, the doctors? Here's their report. Medicare denies more than all and takes longer to pay than all.

still reading? Oh i get it. it was pretty long. I can't wait all night though for you to admit you're wrong pseudo. Its almost 1 AM here on the east coast. Maybe I'll catch your apology when I get to work tomorrow.

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I bet you don't call people "hysterical idiots" when they call you up with their wallets open to ask about such things.

and no I don't call them that or anyone that calls my office that. I have to normally talk them off of the ledge because they're hearing the scare tactics that many on the left are saying about insurance and assume that it happens to all and I've given proof positive that MEDICARE DENIES MORE than private insurance. Now to my clients (who i don't get paid for BTW) who have Medicare I don't scare them and say they pay the slowest and deny the most. I simply offer to help speed the process up and guide them through the medicare process.

Its amazing that those that talked of "death panels" over the summer are called liars by the president and those on the left (and rightly so) but those that scare us into believing insurers deny every claim and the moment you submit a dermatological claim you'll be forever denied your cancer treatment aren't called the same thing.

ab13,
Since you seem to be inside the insurance business (and I'm merely a medical device entrepreneur), perhaps you could help us understand.

- Why is 70-80% medical loss rate considered too high?
- What value add do health insurers provide for their 20-30%?
- When I was on a team building reimbursement payment and settlement systems for GPs, our target was to match or beat 3-4% of Medicare. Why can't private insurers match that?
- When I meet with medical professionals from around the world, they can't grasp the benefit of private insurers for the majority of our reimbursement, especially because they have better outcomes and lower costs with universal coverage.

"You do not have a right to things. You have a right to seek to provide things for yourself within your own capabilities, but you have no right to take things from others, for the moment you do so, you disrespect those others' rights to their own lives and their own freedom."

I thought that there is no right to things. But if I take things from others I am somehow depriving them of their rights. First come first served, they mixed their labor with it, I got mine, I got it. It all makes sense now.

Some of us don't get paid while we're sitting around reading blogs, visionbreaker. And I'm not your reply-monkey.

"those that scare us into believing insurers deny every claim and the moment you submit a dermatological claim you'll be forever denied your cancer treatment aren't called the same thing."

But they do deny some claims, and they invoke the pre-existing condition exclusion on some customers. And since you'll never know if or when that will happen -- though the chance increases if you become a burden to their book or muddy their pools by dint of getting sick -- you'll always have that uncertainty hanging over you.

In the meantime, keep on blaming greedy doctors and dumb patients, because it's not as if you call them that to their faces. Luxury.

Ah, little mousi just wants a little *certainty* on this piece of rock spinning through an uncertain universe. And little mousi is willing to enslave his fellow man to achieve it, or some chimerical semblance of it. How sad.

I suppose that old saw about those trading freedom for security deserving neither is just so much nonsense.

I'm not going to wish cancer on you, but if you do happen to come down with it, you might have a different perspective on what it means to not have that kind of worry over your head. Having one's health subject to such capricious judgements is its own kind of slavery.

(Perhaps you think that waving a copy of Atlas Shrugged over a tumor will make it go away, you rugged, rugged individual.)

oh so by your answer you're admitting that Medicare denies more and takes longer to pay too, right? I won't bother to go over the argument of expense of medicare administration that's hidden but we know that's there. So then why do you argue for single payer with goverment run as opposed to single payer run by even stronger regulated insurers??

You're right they absolutely do deny some claims and that's why we need reform. I've always said that. Recision needs to end and pre-ex does too. But we also need to have everyone (or as close to everyone as possible) covered. And a watered down mandate does not do that and that is the most legitimate reason AHIP came out with their report once the mandate got watered down. Karen Ignani said that herself on "The Situation Room" with Wolf Blitzer although he couldn't wrap his head around the concept.

There are greedy doctors and dumb patients AND unscrupulous insurers. But they're not all greedy, not all dumb and not all unscrupulous. That's the point. You seem to paint every insurer as unscrupulous and that's not the case. How about the agents in MA where there is NO pre-ex. Are they OK? Would I be better if i worked in MA and worse if I worked in say a state with complete pre-ex? Where do you draw that line??

And I do tell (in as nice a way as possible) that my clients are dumb when they do dumb things. I tell them to check with me to ensure that a doctor they're being sent to is in network to reduce their costs or at least make them aware of their costs and then let them choose for themselves. I just got done spending 3 hours with a client explaning the benefits of an HSA that I hope they go with as it would save them immensely (and in turn I'd make less money).

And O'brier, i never said i was anything but knowledgeable about the system as it is today and how to best navigate myself through it as well as the system as its being converted to. "Good" has nothing to do with it. But please share with us what it is you do so I can be amazed at why you think you know so much on the subject.

In comments to that linked post, people argue that the small print on the study shows that most Medicare denials are on account of billing errors or submissions for non-covered services like annual physicals. Metrics 13/14 in the study itself seems to support that.

"You seem to paint every insurer as unscrupulous and that's not the case."

I'm painting the non-system as inherently, structurally flawed, and that's the case. There are small acts of unnecessary malice and grief that take place every day, orders of magnitude less severe than having one's coverage pulled when a diagnosis comes down or during treatment, but which contribute to that easily-identifiable sinking feeling when trying to get one's insurer to say up front whether a procedure is covered, or when the bill appears in the mailbox. That there's an entire industry of people who can share their Handy Hints and Trade Secrets is, once more, an indictment of the mess.

That's pretty vague, I'm not sure what you're asking. I don't know who has said that's "too high". I'm going to guess you're talking about minimum loss ratio requirements. In general I don't think min LR requirements are a good idea because all they do is increase rates. They do not do anything to lower costs, and since they reduce the upside risk insurers will charge a larger risk margin. This is a volatile business, especially in the individual market. It is also a competitive market, so the idea that insurers will just price for a very low LR to make more money is not a reality.

"- What value add do health insurers provide for their 20-30%?"

The same value that insurers provide in any other market. The same value that private insurers add in plenty of other countries that have private insurance.

A couple of things to keep in mind on admin costs:

1) the gap between public and private admin expenses is much smaller than most people think. For starters the Medicare population utilizes much more care and more expensive care than the private insurance population, so measuring admin cost as a percent of claims makes the expense ratios look artificially low
2) Insurers are required by law to keep capital on hand to pay claims, and capital has a cost. Medicare does not have these costs
3) Medicare does not pay 2-3 premium tax as private insurers do
4) Medicare is not required to maintain a staff to handle compliance with various state and federal regulations

Much more helpful info here: http://actuary.org/pdf/health/admin_expenses_sept09.pdf

"- When I was on a team building reimbursement payment and settlement systems for GPs, our target was to match or beat 3-4% of Medicare. Why can't private insurers match that?"

Because we have to negotiate with powerful provider networks and we have very little leverage. We can't tell our insureds that we've terminated the contract with the most popular hospital in the area.

"- When I meet with medical professionals from around the world, they can't grasp the benefit of private insurers for the majority of our reimbursement, especially because they have better outcomes and lower costs with universal coverage."

Better outcomes is very debatable. The problem here is cost and availability, not quality/outcomes. Cost is mostly out of our control. We tried (with pretty good success) to control costs in the early 1990's with the managed care revolution, and the public revolted. Everyone wants the best care money can buy but nobody wants to pay for it. Until people bear more of the cost directly we will continue to have rapidly rising medical costs.

You'll find that most of my thoughts are in agreement with the American Academy of Actuaries policy briefs here:
http://actuary.org/issues/health_reform.asp

I LOVE you grasping at straws to make a point. Why can't you admit you're wrong. I've admitted I'm wrong to you in the past to you.

You don't think that insurers have claims that are denied for billing errors? Non-covered services?

Go back to the pdf file and check Metric 12 (DENIALS, PAYER ALLOWS PHYSICAN'S BILLED CHARGE BUT PAYMENT IS $0)

That line makes the comments section mute. It takes away the silly argument of both of their arguments.

its funny but when non-covered services aren't covered by insurance liberals would blast them to Kingdom Come but when its medical denying physicals its just glossed over.

Again I've gotta say, I love the liberal double standard.

ab13,

there are days when i want to give up the argument with some of these people. I especially love the government tax that the state of NY put on its insured employers (which was then passed through to employers earlier this year. It was a lovely retroactive tax of several percent back to sometime in 2008 I believe. Its amazing how clueless some are to this. Insurance is the new tobacco. Liberals just want to tax it until it goes away.

I especially love your line of:

Everyone wants the best care money can buy but nobody wants to pay for it.

Ain't that the truth. I was especially disgusted at the idiotic Keith Olbermann the other day on his show when he had his one hour rant on insurers and basically said about 10 things out of thin air that made no sense and no basis in fact. They can't make this stuff up fast enough to make their points.

"Medicare denies more than all and takes longer to pay than all. My GOD. Mythbusting all over the place tonight."

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It's been nearly a decade since I was on the reimbursement side of the equation, but I think you should re-read that data in more detail before dissing Medicare.

There are 16 pages of details, and keys to understanding are the ratios, but also the codes (CARCs claims adjusted reason codes).

For example, if you were a pediatrician who had a contracted payment amount for a procedure code and was seeing a covered patient, would you prefer to know you would be paid 61% of the time or 98% of the time?

My experience with pediatricians was that many had resubmission rates for claims up to 600% due to the wide range of conditions presented. Many doctors also complained of preferring to offer free service rather than put their insurance collection staff through the frustration and uncertainty of reimbursement for care outside a few select codes.

there was some sarcasm in my post too. I wasn't completely dissing medicare just those that think its the "do all end all". Most liberals believe Medicare pays quicker (which it doesn't) and OVERALL more accurately which it doesn't. Sure you can cherry pick statistics here and there from the report that work better in your argument but the end result is that Medicare pays slower and is less accurate.

And not to mention the fact that it pays less than private insurance.

now i'm not saying private insurance doesn't have its faults, it absolutely does.

And the coding argumemt to me is bogus. If a billing dept has been doing it long enough they know which insurers want to see which codes for which proceudres. They know how to work the system to their benefit which is why insurers have "red flagged" codes and providers. Does medicare have that???

thanks for the response, I've been in meetings and missed this earlier.

I have no issue with private insurance for expanded coverage, as much of Europe has.

I have real problems with the US concept of private health insurance for basic coverage as I have been self-employed inventor, part of startup,part of big company, and out solo again, so I've experienced the wide range of problems, as well as dealt with them professionally. You only discover you have a pre-existing condition in your family when you leave a big company and try to buy new insurance. Cobra is impractical.

Since my family is very healthy, we've tended to be self-insured, especially after discovering we were labeled with pre-existing conditions. By paying our own bills I've learned to pre-negotiate with physicians. Some would accept payment at a discount for immediate payment as they didn't have to deal with insurance hassles. I've offered to pay 50% over their private insurance reimbursement rate at time of visit, and more and more doctors are refusing, as many who are part of groups will not take anyone without insurance regardless of how much we pay, recession be damned. I suspect they have some contract restrictions with their approved insurers.

Any actuary can quickly identify the benefits of putting everybody in the same pool and then sharing the risk across the largest number of people, so why all the machinations to avoid doing so?

As to coding problems, note my experience was nearly a decade ago. Specialists didn't have the problems, but GPs and pediatricians, because of the wide range of conditions, had significantly higher rework rates. Read the AMA doc and you can see data in there about the types of problems.

My bottom line is that I want Single Payer, in essence Medicare for All. I think it is most efficient, even if we have split reimbursement for under/over 65. I also know that we could modify the settlement engine to easily integrate private "Lexus" insurance policies as they do in Europe.

This is also an acknowledgement of what I see coming is perhaps the worst of all worlds - a lot of effort to force coverage at high rates but not address the underlying issues.